CORPORATE GOVERNANCE PRACTICES, FORUMS AND ITS IMPACT ON INVESTORS

INTRODUCTION
The world has become a borderless global village. The spirit to implement internationally accepted
norms of corporate governance standards found expression in private sector, public sector and the
government thinking. The framework for corporate governance is not only an important component
affecting the long-term prosperity of companies, but it is critical in terms of National Governance,
Human Governance, Societal Governance, Economic Governance and Political Governance since the
activities of the corporate have an impact on every aspect of the society as such.
The need to find an institutional framework for corporate governance and to advocate its cause has
resulted in the setting up and constitution of various corporate governance forums and institutions the
world over. In this study lesson we will be discussing with some of the prominent Forums and Institutions
of Corporate Governance.
In the words of Mr. N.R. Narayana Murthy, Chief Mentor, Infosys Limited, “Corporate governance is
maximizing the shareholder value in a corporation while ensuring fairness to all stakeholders,
customers, employees, investors, vendors, the government and the society-at-large. Corporate
governance is about transparency and raising the trust and confidence of stakeholders in the way the
company is run. It is about owners and the managers operating as the trustees on behalf of every
shareholder - large or small.”

A. INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI)

Vision and Mission Statements

Recognising the fact that Corporate Governance is the key to development of corporate sector, the
Institute has adopted a farsighted vision, “To be a global leader in promoting Good Corporate
Governance”
The Mission of the Institute is, “To develop the high calibre professionals facilitating good Corporate
Governance”.

ICSI’s Philosophy on Corporate Governance

The ICSI, after extensive research, has taken a lead step in defining Corporate Governance as “the
application of best management practices, compliance of law in letter and spirit and adherence to ethical
standards for effective management and distribution of wealth and discharge of social responsibility
for sustainable development of all stakeholders.”

ICSI Initiatives
► Corporate Governance Research and Training - ICSI has set up the ICSI- Centre for
Corporate Governance Research and Training (CCGRT) with the objective of fostering and
nurturing research initiatives among members of the Company Secretaries profession and other
researchers.
► ICSI National Award for Excellence in Corporate Governance was instituted by the ICSI
in 2001 to identify, foster and reward the culture of evolving global best practices of corporate
governance among Indian companies. Each year, the award is conferred upon two best governed
companies and ICSI Life Time Achievement Award for Translating Excellence in Corporate
Governance into Reality is bestowed on an eminent personality.
► Focus on Corporate Governance in the Course Curriculum - Considering corporate
governance as core competency of Company Secretaries, education and training for Company
Secretary significantly focuses on corporate governance. One full paper on Corporate
Governance titled “Governance, Risk Management, Compliances and Ethics” forms part of the
syllabus in the Professional Programme.
► PMQ Course in Corporate Governance - ICSI has launched a Post Membership Qualification
Course in Corporate Governance to enable its members gain acumen, insight and thorough
expertise in corporate governance.
► Secretarial Standards – As a pioneering initiative, ICSI issues Secretarial Standards to
integrate, harmonise and standardise the diverse secretarial practices prevalent in the corporate
sector. Two Secretarial Standards issued by ICSI i.e. SS-1: Secretarial Standard on Meetings
of the Board of Directors and SS-2: Secretarial Standard on General Meetings have been
notified in the Official Gazette under Section 118 (10) of the Companies Act 2013 which
provides that every company shall observe Secretarial Standards with respect to General and
Board Meetings specified by the Institute of Company Secretaries of India and approved as
such by the Central Government. They have been effective from July 1, 2015. The introduction
of Secretarial Standard has marked a new era of healthy secretarial practices among
professional.
► Corporate Governance Publications – The Institute regularly brings out publications of
interest to members and corporate sector to inculcate the culture of good governance.
► Directors Development and Capacity Building Programmes - Recognizing that leadership
development in boardroom is the key driver to better governance, the Institute organizes
directors’ development programmes. The Institute also conducts extensive programmes
throughout India and abroad strengthening specialization in corporate governance.
► Investor Education and Awareness – Committed to the cause of investor education, ICSI is
actively engaged in activities relating to investor awareness and education. So far, the Institute
has organised more than 4500 such programmes. Booklets to educate investors have also been
issued by the Institute in English, Hindi as well as other regional languages.
► ICSI Recommendations to Strengthen Corporate Governance Framework – ICSI after a
detailed study of corporate governance standards, principles and practices across the world,
made its recommendations to strengthen the Corporate Governance Framework. Corporate
Governance Voluntary Guidelines, 2009 issued by MCA draw substantially from the ICSI
Recommendations to Strengthen the Corporate Governance Framework.
► Repository of Independent Directors – The Institute jointly with other professional statutory
bodies under the active encouragement of the Ministry of Corporate Affairs, maintains a
Repository of Independent Directors to facilitate the individuals who are eligible and willing
to act as Independent Directors and also to facilitate Companies to select the persons who are
eligible and willing to act as Independent Directors under provisions of the Companies Act,
2013.
► National Policy on Corporate Governance – The Ministry of Corporate Affairs had
constituted a Committee to formulate a Policy Document on Corporate Governance under the
chairmanship of Mr. Adi Godrej. The President, ICSI was the Member Secretary/Convener.
The concept paper prepared by ICSI was the base paper for discussion for this committee. The
Committee submitted its report, which is articulated in the form of Guiding Principles of
Corporate Governance, to the Government of India on 18th September, 2012.
► Customied Training Programme – As an initiative towards propagating and creating
awareness on good corporate governance, the Institute has been organising customised training
programmes for Regulatory bodies, Banks and Public sector companies on Corporate Laws
and Governance.
► Founder member of National Foundation for Corporate Governance – The ICSI is one of
the four founder trustees of National Foundation for Corporate Governance, alongwith MCA,
CII and ICAI. The vision of NFCG is: Be A Catalyst In Making India The Best In Corporate
Governance Practices.
► Founder member of Corporate Secretaries International Association (CSIA) – ICSI is a
founder member of Corporate Secretaries International Association, alongwith the Chartered
Secretaries Institutes of Australia, Hong Kong, Malaysia, Singapore, South Africa, UK and
Zimbabwe. CSIA was launched in March 2010 and has issued ‘Twenty Practical Steps to Better
Corporate Governance’.
 ► Linkages of International Bodies – The Institute has linkages with various International
bodies involved in promoting Corporate Governance such as World Bank, Organisation for
Economic Co- operation and Development (OECD), International Corporate Governance
Network (ICGN), Global Corporate Governance Forum GCGF (IFC - Washington), Global
Reporting Initiative (GRI), Asia Corporate governance Association (ACGA). The Institute also
holds various Joint programmes with, these institutions and also with professional bodies like
CASS Business School (London), ICSA Singapore, ICSA Malaysia, etc.

ICSI’s Approach - Solution to Critical Development Issues

The ICSI’s approach to Corporate Governance provides the solution to the development issues. Wealth
creation, management and sharing are the objectives of Corporate Governance in broadest sense.
Maximum creation and effective management of wealth requires application of best management
practices whereas sharing of wealth requires compliance of law in letter and spirit along with adherence
to ethical standards and discharging corporate social responsibility so as to develop trust amongst all the
stakeholders.

Members of ICSI are in
prominent positions in the
management of board affairs
at high levels.
Member of the institute are imparted wider knowledge of
management functions, major laws applicable to a company as well as
of good corporate governance practices and are subject to a strict
Professional Code of Conduct under the Company Secretaries Act,
1980, so as to ensure ethics
in dealing with all the stakeholders.

B. NATIONAL FOUNDATION FOR CORPORATE GOVERNANCE (NFCG)

With the goal of promoting better corporate governance practices in India, the Ministry of Corporate
Affairs, Government of India, has set up National Foundation for Corporate Governance (NFCG) along
with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and
Institute of Chartered Accountants of India (ICAI). In the year 2010, stakeholders in NFCG have been
expanded with the inclusion of Institute of Cost Accountants of India and the National Stock Exchange
of India Ltd.

Vision
⚫ “Be the Key Facilitator and Reference Point for highest standards of Corporate Governance in
India.”

Mission of NFCG
⚫ To foster a culture for promoting good governance, voluntary compliance and facilitate
effective participation of different stakeholders;
⚫ To catalyse capacity building in new emerging areas of Corporate Governance.
⚫ To further research, scholarship, and education in corporate governance in India;
⚫ To create a framework of best practices, structure, processes and ethics;
NFCG endeavours to build capabilities in the area of research in corporate governance and to
disseminate quality and timely information to concerned stakeholders. It works to foster partnerships
with national as well as international organisations.
National Foundation for Corporate Governance (NFCG) was set up in the year 2003 by the Ministry of
Corporate Affairs (MCA), in partnership with Confederation of Indian Industry (CII), Institute of
Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI) to promote
good Corporate Governance practices both at the level of individual corporates and Industry as a whole.
In the year 2010, Institute of Cost Accountants of India (ICAI) and National Stock Exchange (NSE) and
in 2013 Indian Institute of Corporate Affairs (IICA) were included in NFCG as Trustees.
At the national level, NFCG works with premier management institutes as well as nationally reputed
professional organisations to design and administer Directors Training Programmes. The Foundation
provides accreditation to these organisations based on their meeting the eligibility criteria designed
along with continuing adherence to the same. On obtaining the accreditation these organisations, with
the support of NFCG, would set-up a “National Center for Corporate Governance (NCCG)” to provide
a training to Directors, conduct research and build capability in the area of corporate governance.
NFCG also would work to have arrangements with globally reputed organisations with the aim of
promoting bilateral initiatives to improve regulatory framework and practices of corporate governance
in a concerted and coordinated manner.
The internal governance structure of NFCG consists:
– Governing Council
– Board of Trustees
– Executive Directorate
Governing Council
Governing Council of NFCG works at the apex level for policy making. It is chaired by Minister in- charge,
Ministry of Corporate Affairs, Government of India. The members of the Governing Council are :
⚫ Secretary, Ministry of Corporate Affairs, Government of India - Vice Chairman of the
Governing Council;
⚫ Second Vice Chairman of the Governing Council (Industry)
⚫ President, Confederation of Indian Industry (CII);
⚫ President, Institute of Chartered Accountants of India (ICAI);
⚫ President, Institute of Company Secretaries of India (ICSI);
⚫ President , The Institute of Cost Accountants of India (ICAI-CMA);
⚫ Director General, Confederation of Indian Industry (CII);
⚫ Secretary, Institute of Chartered Accountants of India (ICAI);
⚫ Secretary, Institute of Company Secretaries of India (ICSI);
⚫ Secretary, The Institute of Cost Accountants of India (ICAI-CMA);
⚫ Chairman, Indian Banks Association;
⚫ Chairman, Insurance Regulatory and Development Authority;
⚫ Chairman, Securities and Exchange Board of India;
⚫ Secretary, Banking Division, Ministry of Finance
⚫ Secretary, Department of Public Enterprises.
⚫ MD and CEO , National Stock Exchange (NSE)
⚫ Director General & CEO, Indian Institute of Corporate Affairs (IICA)
⚫ Eminent Industrialists (4)
Board of Trustees
Board of Trustees deal with the implementation of policies and programmes and lay down the procedure
for the smooth functioning. It is chaired by Secretary, Ministry of Corporate Affairs, Government of India.
The members of the Board of Trustees are: -
● Director General, Confederation of Indian Industry (CII);
● Secretary, Institute of Chartered Accountants of India (ICAI);
● Secretary, Institute of Company Secretaries of India (ICSI); and
● Secretary, The Institute of Cost Accountants of India (ICAI-CMA)
● Representative, National Stock Exchange (NSE)
● Director General & CEO, Indian Institute of Corporate Affairs (IICA)
Executive Directorate
The Executive Directorate provides the internal support to NFCG activities and implements the decisions
of the Board of Trustees. The Executive Director is the Chief Executive Officer of NFCG. The Executive
Directorate exercises such powers as may be delegated to it by the Board of Trustees to carry out such
functions as may be entrusted to it by the Board. The Executive Director also functions as the Secretary
of the Council and the Board is supported by full time dedicated professional secretariat.

C. ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)

The Organisation for Economic Co-operation and Development (OECD) was established in 1961 when
18 European countries plus the United States and Canada joined forces to create an organisation
dedicated to economic development. It is one of the first non-government organizations to spell out the
principles that should govern corporates. The mission of the Organisation for Economic Co-operation
and Development (OECD) is to promote policies that will improve the economic and social well-being
of people around the world.

Mission of OECD:
The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote
policies that will improve the economic and social well-being of people around the world.
The OECD provides a forum in which governments can work together to share experiences and seek
solutions to common problems.
The OECD had focused on helping governments around the world to:
⚫ Restore confidence in markets and the institutions that make them function.
⚫ Re-establish healthy public finances as a basis for future sustainable economic growth.
⚫ Foster and support new sources of growth through innovation, environmentally friendly ‘green
growth’ strategies and the development of emerging economies.
⚫ Ensure that people of all ages can develop the skills to work productively and satisfyingly in
the jobs of tomorrow.
The OECD provides a forum in which governments can work together to share experiences and seek
solutions to common problems. OECD works with governments to understand what drives economic,
social and environmental change. OECD measures productivity and global flows of trade and
investment analyse and compare data to predict future trends, set international standards on a wide range
of things, from agriculture and tax to the safety of chemicals etc.
There are 35 member countries of OECD across the globe. They include many of the world’s most
advanced countries but also emerging countries. Currently following Countries are members of OECD -
Australia, Austria,
Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Israël, Italy, Japan, Korea, Latvia, Luxembourg, Mexico, Netherlands, New
Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey,
United Kingdom and United States.
Council: Decision-making power is vested in the OECD Council. It is made up of one representative per
member country, plus a representative of the European Commission. The work mandated by the Council
is carried out by the OECD Secretariat.
Committees: Representatives of the 35 OECD member countries meet in specialised committees to
advance ideas and review progress in specific policy areas, such as economics, trade, science,
employment, education or financial markets. There are about 250 committees, working groups and
expert groups.
Secretariat: The Secretariat in Paris is made up of about 2500 staff that supports the activities of
committees, and carry out the work in response to priorities decided by the OECD Council. The staff
includes economists, lawyers, scientists and other professionals. Most staff members are based in Paris
but some work at OECD centres in other countries. OECD’s work is based on continued monitoring of
events in member countries as well as outside OECD area, and includes regular projections of short and
medium-term economic developments. The OECD Secretariat collects and analyses data, after which
committees discuss policy regarding this information, the Council makes decisions, and then
governments implement recommendations.
The OECD Principles of Corporate Governance were first published in 1999. Since then the Principles
have become an international benchmark for policy makers, investors, corporations and other stakeholders
worldwide. The original principles of OECD were revised and the revised principles were issued in
2004. The revision of the original principles was done to take into account the developments and the
corporate governance scandals highlighted the need for improved standards. It was recognized that the
integrity of the stock market was critical and to the revised principles were designed to underpin this
integrity. The 2004 version of the Principles were again revised in 2015.

D. INSTITUTE OF DIRECTORS (IOD), UK

The IOD is a non party-political business organisation established in United Kingdom in 1903. The
IOD is charged with promoting good corporate governance for UK business. The board of IOD is
responsible for the overall leadership of the Institute of Directors (IOD) and setting its values,
standards, aims and objectives and delivering them in line with the objects of the Royal Charter. The
board is composed of the chair, a majority of non-executive directors, and the director general and
executive directors. It acts as a unitary board and has the following powers and responsibilities:
⚫ to manage the affairs and long-term success of the institute
⚫ to approve the strategy of the institute, business and financial planning, to hold the executive to
account and ensure financial and risk stewardship
⚫ to approve the annual report and accounts
⚫ to appoint, reappoint and remove (acting by the non-executive directors only) the director
general and other executive directors, as the board permits
⚫ to ensure open and transparent engagement with all stakeholders when carrying out its duties
⚫ to establish and dissolve committees and groups of the board
The council is the guardian of the IOD constitution, ensuring that the objects of the IOD’s Royal
Charter are delivered. It comprises 11 members of geographical areas, 13 elected members and the
IOD chairman. The council carries out the following responsibilities:
 ⚫ to appoint, reappoint and remove the non-executive directors and to determine their
independence, having considered any recommendations of the nomination committee
⚫ to hold the board to account for the delivery of the charter objects and adherence to the laws
of the
institute
⚫ to provide critique and opinion to the board on the overall progress of the institute
⚫ to monitor the board’s engagement with membership and stakeholders
⚫ to appoint and remove a senior independent council member who will act as deputy chair of the
council The IOD seeks to provide an environment conducive to business success.

Objects of IOD
(a) to promote for the public benefit high levels of skill, knowledge, professional competence and
integrity on the part of directors, and equivalent office holders however described, of
companies and other organisations;
(b) to promote the study, research and development of the law and practice of corporate
governance, and to publish, disseminate or otherwise make available the useful results of such
study or research;
(c) to represent the interests of members and of the business community to government and in all
public forums, and to encourage and foster a climate favourable to entrepreneurial activity
and wealth creation; and
(d) to advance the interests of members of the Institute, and to provide facilities, services and
benefits for them.

E. COMMONWEALTH ASSOCIATION OF CORPORATE GOVERNANCE (CACG)

The Commonwealth Association of Corporate Governance (CACG) was established in 1998 with the
objective of promoting the best international standards germane to a country on corporate governance
through education, consultation and information throughout the Commonwealth as a means to achieve
global standards of business efficiency, commercial probity and effective economic and social
development.
The CACG had two primary objectives:
─ to promote good standards in corporate governance and business practice throughout the
Commonwealth; and
─ to facilitate the development of appropriate institutions which will be able to advance, teach
and disseminate such standards.
The CACG aimed to facilitate the development of institutional capacity that promotes good
corporate governance by education, consultation and information in all Commonwealth countries.
Corporate governance in the Commonwealth is important and is concerned with:
─ the profitability and efficiency of Commonwealth business enterprises, and their capacity to
create wealth and employment;
─ the long-term competitiveness of Commonwealth countries in the global market;
─ the stability and credibility of the Commonwealth financial sectors, both nationally and
internationally;
─ the relationships between business enterprises within an economy and their sustained ability to
participate in the global economy; and
─ the relationship between such business enterprises and their various stakeholders comprising
 shareholders, managers, employees, customers, suppliers, labour unions, communities,
providers of finance, etc. The Commonwealth Foundation is funded principally through
annual contributions made by member governments.
Board of Governors comprising, in the main, UK-based representatives of member
governments and five representatives of civil society, determine the policies
There are 53 countries of the Commonwealth, of which 46 are currently Commonwealth
Foundation members. Membership of the Foundation is voluntary, and is open to all
Commonwealth governments.
The CACG guidelines set out 15 Principles of corporate governance aimed primarily at boards
of directors of corporations with a unitary board structure, as will most often be found in the
Commonwealth. The Principles apply equally to boards of directors of all business enterprises
– public, private, family owned or state-owned. The Principles are applicable to both executive
and non-executive directors.

CASE STUDIES OF CORPORATE GOVERNANCE FAILURES

a) Reebok India case Agencies probing the alleged Rs 870 crore corporate fraud in the
operation of Reebok India have detected a systemic "mismanagement" in the business
planning and governance of the company reportedly done by some of its officials and
employees.
Three different agencies -- the I-T department under Finance Ministry, the Serious Fraud
Investigation Office (SFIO) under Corporate Affairs Ministry and the Economic Offences
Wing of Gurgaon police -- have recorded the findings almost four months after a criminal
case was filed by Reebok India against two of its former employees.
The main reason for this scam were the governance and operations in the company were
mismanaged. The bills were inflated and not recorded correctly. So, the probe clearly
indicates that it was not a corporate scam in the apparel manufacturing firm but it was non-
adherence to the rules and guidelines of business procedures in the firm," sources privy to
the probe said.
The guidelines under the Companies Act were violated which is suspected to have led to
other contraventions like tax evasion. The I-T which has indicated to an alleged Rs 140
crore tax evasion in the case, the sources said, will now work to ensure that the company,
later, does not claim any "bad debt". A bad debt is that amount that is owed to a business
or individual and has to be written off by the creditor as a loss because the debt cannot be
collected because of a host of reasons. There were no serious borrowings or lending of
Reebok India.
The probe agencies investigation will make sure that the firm does not qualify to claim bad
debt from anywhere in the later course, Probe agencies have also found that some of the
officials of the company could have been involved in the inflation of bills and over-
valuation of the goods of the firm. In the much publicized criminal complaint filed at the
Gurgaon police’s Economic Offence Wing in May, Reebok India had alleged that its
former Managing Director Subhinder Singh Prem and Chief Operating Officer Vishnu
Bhagat were involved in an Rs 870-crore fraud by indulging in “criminal conspiracy” and
“fraudulent” practises over a period of time. Gurgaon police had some days back arrested
Subhinder Singh and Vishnu Bhagat along with three others – Sanjay Mishra, Prashant
Bhatnagar and Surakshit Bhat. Subhinder Singh and Vishnu Bhagat were booked for fraud,
criminal conspiracy and other charges under IPC for allegedly siphoning off the sportswear
company’s money by creating ghost distributors across the country and generating forged
bills over the last five years.
While the I-T department is scrutinising documents related to accounts and imports of the
firm, the SFIO is probing the entire governance affairs of the company under Section 235
of the Companies Act.
According to sources, the probe agencies also do not rule out the culpability of accounting
officials of the firm at this stage for their “deliberate” or “mistaken oversight” in account
books which led to the alleged financial irregularities.
In the much publicised criminal complaint filed at the Gurgaon police's Economic Offence
Wing in May, Reebok India had alleged that its former Managing Director Subhinder Singh
Prem and Chief Operating Officer Vishnu Bhagat were involved in a Rs 870-crore fraud
by indulging in "criminal conspiracy" and "fraudulent" practices over a period of time.
Gurgaon police had some days back arrested Singh and Bhagat along with three others --
Sanjay Mishra, Prashant Bhatnagar and Surakshit Bhat. Singh and Bhat were booked for
fraud, criminal conspiracy and other charges under IPC for allegedly siphoning off the
sportswear company's money by creating ghost distributors across the country and
generating forged bills over the last five years.
While the I-T is scrutinising documents related to accounts and imports of the firm, the
SFIO is probing the entire governance affairs of the company under Section 235 of the
Companies Act. Investigating authorities blamed it on the gross mismanagement in
corporate governance and collapse of business planning and ruling of the company.
SFIO investigations reveal Reebok India ran a “franchisee referral programme”, through
which it collected Rs 88.11 crore from 60-odd high net-worth individuals, including former
attorney general Soli J Sorabjee, promising interest of 16-20 per cent. The SFIO
investigators say these funds were recycled by Reebok India employees as part of effort to
boost cash flow. SFIO said there was a lapse in corporate governance practices at Reebok
India by the Adidas group.
Corporate Governance Failure at CRB Capital Markets ltd(financial Irregularities
& Illegalities) The case examines:
• How the CRB group was able to defraud the investors and the regulatory authorities with
ease. The role of RBI and SBI is also explored. • It exposes ineffectiveness of regulators,
and risk faced by small investors. The Bhansali scam resulted in a loss of over INR 1200
cr. C R Bhansali launched the finance company CRB Capital Markets, a public limited
company and ruled like a financial wizard from 1992 to 1996 by collecting money from
the public in the form of fixed deposits, bonds and debentures and money was transferred
to the 133 subsidiaries and unlisted companies that never existed. The company offered
various services including merchant banking, leasing and hire purchase, bill discounting
and corporate funds management, fixed deposit and resources mobilization, mutual funds
and asset management, international finance and forex operations. The group’s global
outlook and timely foreign collaborations were responsible for its success. Suspicions arose
when CRB cap’s net-worth grew from INR 2 crores in 1992 to INR430 crores in 1996. In
mid 1996, reports regarding frauds being committed by CRB group started to reveal out.
a) Problem  The company collected money from the public in the form of fixed deposits,
bonds and debentures and money was transferred to the 133 subsidiaries and unlisted
companies that never existed.  Financial irregularities & illegalities were taking place.
The company had allegedly used its SBI accounts to siphon off bank funds, claiming it was
cashing interest warrants and refund warrants of principal amounts.  Rigging share prices
through own money, Dummy companies made by Bhansali.  The company was not
making payments to the fixed deposits.  CRB Capital was a defaulting NBFC and as a
consequence was liable to be wound up under Section 45MC of the RBI Act. A number of
cooperative banks in the State of Gujarat had placed funds aggregating INR 50 crores with
CRB Capital and they had received a severe jolt because of the non-payment of those
deposits by CRB.  Siphoning off of funds from SBI; as the alleged large scale misuse of
the 'at par' discounting facility by CRB Capital.  CRB Capital, although it had net owned
funds of more than INR 50 Lakhs, did not apply for registration till the year 1996 though
it was pointed out by the RBI that on 12.04.1993, based on the Shah Committee
recommendations on the role of NBFCs a circular was issued to all the NBFCs advising
them to get themselves registered with RBI if their net owned funds were more than INR
50 Lakhs.  Several illegalities and irregularities came to light. RBI had also received
complaints from the Tourism Finance Corporation of India Limited regarding nonpayment
of deposits. CRB corporation’s income more than doubled between 1994-1996. 
Defrauding the SBI; dividend warrants treated as demand drafts, no overdraft allowed.
Bhansali used fake accounts in Chennai, Calcutta and rajasthan to withdraw the dividends
from SBI accounts. b) Solutions The problems were analysed thoroughly & solutions were
implemented immediately as the problem was declining investor confidence in banks, poor
performance of NBFC’s, for creation of smart investors and much more. The following
solutions were implemented:  RBI filed a winding up petition claiming that the
continuance of the CRB Group was not in interest of the public and depositors. The order
prohibited CRB from selling, transferring, mortgaging or dealing in any manner with its
assets & from accepting public deposits.  Cases had been registered against all the
accused under sections 120-B and 420 of the Criminal Procedure Code and the Prevention
of Corruption Act.  The high court here has set up a three-member committee with a
year’s term, chaired by retired district judge S K Tandon, with wide powers to ensure
termination of the scheme and repayment to unit holders.  RBI agreed that the
continuance of CRB Capital, a Non-Banking Financial Company, was detrimental to
public interest and also detrimental to the interest of depositors of the company. Hence,
RBI decided to apply for winding up of CRB Capital by invoking the provisions of Section
45MC (1) (d) of the RBI Act.  RBI issued a prohibitory order under Section 45K read
with Section 45MB (1) and 45MB (2) of the RBI Act. By virtue of the said order, RBI
prohibited CRB Capital from accepting deposits with immediate effect and CRB Capital
was also precluded from accepting deposits from any person in any form whether by way
of fresh deposits or renewal or otherwise.  RBI directed CRB Capital not to sell, transfer,
create charge or mortgage or deal in any manner with its property and assets without prior
written permission of RBI for a period of six months from the date of the order. At last, all
happened because of:  Lack of communication between the banks, RBI and the
government officials.  Blame game between RBI and SEBI.  RBI claimed that it had
no power to examine the asset quality.
Corporate Governance Failure at Sahara Parties involved Two groups of Sahara India:
a) Sahara India Real Estate Corporation and Sahara Housing Investment Corporation
Sahara’s investment program included schemes that were similar to a typical Indian bank’s
fixed or recurring deposits. The company largely sold such schemes to small investors in
towns and rural areas through their network of agents. These financial products allowed
investors to deposit small amounts such as 50 rupees per day for returns that were said to
be higher than what bank deposits would generate. OFCD instruments were issued in the
name of the two companies but the cheques were sought in the name of Sahara India. The
money raise through OFCDs was camouflaged as private placements whereas they were
public issues. These debentures can be converted into shares at the will of the debt holder
or the investor but the price is decided by the company. b) Problem The public notice comes
after RBI received complaints from individuals that the Sahara group is mobilizing money
from the public under the generic name of Sahara Pariwar and Sahara India Pariwar. These
two companies are not registered under RBI. Only three Sahara group entities are registered
with RBI -- Sahara India Financial Corp. Ltd (SIFCL), Sahara India Corp Investment Ltd
(SICIL) and Sahara India Infrastructural Development Ltd. (SIIDL).Of these three entities,
SIFCL, a residual non-banking company, has been directed by RBI to phase out acceptance
of deposits from the public. SICIL and SIIDL are not authorized to accept deposits from
the public. The order to arrest Subrata Roy and two directors of Sahara was issued for their
failure to appear before the apex court in a contempt case arising out of non refund of Rs
24,600 crores to investors by two of the Sahara group companies. c) The Year 2012 The
apex court by its August 31, 2012 order had asked Sahara India Real Estate Corp Ltd.
(SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to return, along
with 15 percent interest, the investors INR 24,600 crore that two companies had © 2015
Global Journals Inc. 1 (US) 32Global Journal of Management and Business Research
Volume XVI Issue I Version I Year ( ) 2016 © 2016 Global Journals Inc. 1 (US) G
Strategies that Led to Failure - Case Study of Corporate Governance collected through
optionally fully convertible debentures (OFCSs) in 2007-08 d) 2014 The apex court by its
March 26, 2014 order had asked Sahara to deposit INR10, 000crore - INR 5000 crores in
cash and INR 5,000 crores in bank guarantee - towards the repayment of the investors
money. It had said that this was also a condition for the release of Roy and the other
directors from Tihar Jail where they are locked in judicial custody. e) 2015 Sahara India
now claims that it has already repaid around INR 23,000crore directly to the investors and
above that it has already submitted INR 12000crore to SEBI. Out of the investors it has
repaid it has submitted proof for about 75% and 25% still remains which they say is lying
in their Mumbai godowns. But the proof of investors which they have submitted is
generally incomplete with some forms only consisting of village name or only mobile
number or even only name of the investor. SEBI also required details of bank accounts in
the form of financial papers but Sahara contented that bulk of their investors did not have
bank accounts in formal financial papers. Between 2008 and 2012 the RBI auditors have
been checking the authenticity of investors under strict norms and only then the next
months payments were allowed and they have not found even one fictitious account during
these four years Sahara claims to deposit around Rs 18000 crores by the time Subrata Roy
is bailed out of jail and has already deposited Rs 12000 crores with SEBI so far out of
which SEBI has refunded only Rs 2000 crores to the investors.
 The Failure of Corporate Governance – DHFL Perspective

The importance of corporate governance becomes the talk of the street when a corporate fraud
becomes a piece of breaking news. On 29th January 2019, Cobrapost, an investigative journalism
company, held a press conference to debut its coverage of a huge banking and financial scam in
India. This financial scam was uncovered by closely auditing and examining public records of
government authorities as well as information available in the public domain. The scam is reported
to involve a sum of more than Rs. 31,000 crore. The suspects of this huge financial fraud are
claimed to be the primary promoters of Dewan Housing Finance Corporation Limited (DHFL) and
their associated companies. This is an example of a systematic craft to steal public money in broad
daylight.

The scam has been pulled off mainly by sanctioning and paying out funds in unsecured and dubious
loans. These loans amount to thousands of crores of rupees and were provided to dubious shell
companies which were related to DHFL’s own primary stakeholders through their proxies and
associates. Added to that, no security or collateral and the proceeds were utilized for private asset
creation, neither offshore nor in India. Such large loans were disbursed for new projects to the
shell companies, which were newly incorporated, without scrutinizing the feasibility and viability
of those projects. A lot of these shell companies are operating from the same email addresses and
are run by the same group of initial directors. What raises more concern is the fact that DHFL has
hidden the terms of loan and terms of repayment in the financial statements. They also ensured
that most of the shell companies have hidden the name of the lender – DHFL. By lending to shell
companies without due diligence, DHFL has ensured that the recovery of such dubious loans is
impossible since the companies or their directors themselves do not own any assets. This way the
private assets acquired by the promoters and their associates by using the funds from these dubious
loans are completely ring-fenced from any recovery process. Thus, only public sector banks such
as State Bank of India and Bank of Baroda are the primary losers. The loss amounts to a staggering
sum of over Rs. 11,000 crore and Rs. 4,000 crore, respectively. Other entities that share the losses
are foreign banks and shareholders from among the public or investors of DHFL.
After the press conference, DHFL shares plunged by 11% in the market. While the investors are
waiting for further investigation by the authorities, the reputation of the company has already been
dented. The credit rating agencies like Brickwork has downgraded various loan facilities by one
or two notches. The scam represents a complete and absolute failure of corporate governance, and
there is no way to even pretend that corporates are reliable and can commit to the best practices of
the industry as required or expected by the law. The investigation brought to light the illegal insider
trading, violation of takeover regulations of SEBI, creation of assets offshore for tax evasion, or
laundering money illegally. With AAA rating to the company’s credit worthiness, DHFL’s inner
working raises the question about the credibility and conduct of all credit rating agencies, which
have failed miserably to identify its irregularities, as unearthed in this investigation. Even auditors
have failed to address the irregularities in the annual audit reports.The participation of promotors
in directing loan amounts to shell company without scrutiny or security shows a complete
deviation from the corporate governance policies.
This isn’t the first time when the corporate governance has failed to promote corporate fairness,
transparency and accountability. Scandals or scams such as 2G Scam, PNB Scam, Satyam Scam
or Sahara Scam etc. all are the result of bad corporate governance. In Satyam Scam, Raju brothers
proposed merging with a company known as MAYTAS which is nothing but Satyam spelled
backwards. This involved major non-existing cash inflows of funds in the balance sheet, falsely
making balance sheet heavy to remain competent. This scam made the need of corporate
governance felt very badly along with the importance of good corporate governance and this was
the reason that corporate governance became an integral part of the Companies Act, 2013. Not
only in India, but companies around the world like Enron in US and Parmalat in Italy fell out
because of the corrupt practices followed by the board of directors and the management of the said
companies and their financial consulting firms.
The main goal of virtually every publicly-owned company business is to maximize profits for its
owners or stakeholders while maintaining corporate social responsibility. Shareholder value gets
lost when things are done illegally, when principles of corporate governance are not adhered to,
when cohesive action is not taken. Difficulty arises for an analyst when even companies like
DHFL, with AAA ratings and strong corporate governance norms, fails to comply with ethical
business practices. With such scams coming in the light regularly, it raises a question on the ability
of analysts, demanding a stricter monitoring of internal control system within an organization.The
most common issues in corporate governance include conflict of interests, oversight issues,
accountability issues, transparency, and ethics violations. An analyst should look out for red flags
such as accounting irregularities, consistent growth during weak performance of the industry,
frequent related party transactions and off balance sheet transactions, etc. to identify any possible
irregularities in the financial statement of the organization. The scrutiny of Audit Committee is a
vital process to understand the strength of corporate governance norms. An analyst can focus on
the audit committee’s powers, functions, responsibilities, and relationships within the framework
of corporate governance to gain an insight about the effectiveness of the norms.
With the DHFL scam easily escaping the sight of auditors, credit rating agencies, analysts,
authorities and regulators, the investigative journalism acted as a watchdog in the public interest.
By indulging in the public records and presented documents of DHFL, they were able to unravel
the channel of money laundering of the promoters. Such deep dive analysis consumes months of
investigation and scrutiny by dedicated journalists and financial market experts. Work of
Cobrapost is commendable for bringing the swindle in the notice of the authorities. The true scale
of the scam can be arrived at only after investigative agencies conduct a thorough forensic audit
of the money trail.